Corporate > AG Deal Diary > Court Upholds Claim Against Private Equity Firm for Federal Labor Law Violation Stemming from Closure of Portfolio Company
29 Oct '13

A decision last month by the district court for the Northern District of Indiana is the latest in a string of recent judicial decisions to confirm that a plaintiff has successfully stated a plausible claim for relief under the WARN Act on the “single employer” theory.

The case, Young v. Fortis Plastics LLC1 was filed by a worker laid off by a manufacturing facility in Forth Smith, Arkansas, alleging violations of the WARN Act upon closure of the facility.  The WARN Act seeks to protect workers who suffer job losses due to mass layoffs by requiring that certain employers provide sixty days’ notice to workers before engaging in a mass layoff or plant closure and by enabling aggrieved employees to sue the employer for back pay and benefits upon failure to receive such notice. The federal statute defines “employer” as “any business enterprise” that employs the requisite number of employees. Because the statute does not define the term “business enterprise,” the Indiana district court upheld the application of a multi-factor test based on regulations of the Department of Labor (DOL).  The court stated that, due to the nature of mass layoffs and plant closure at issue in the case, a direct employer will often not have the financial means to pay obligations under the WARN Act.  As a result, the court deemed it reasonable to require Fortis’ private equity parent to assume those obligations where it could be shown that the private equity firm was partially responsible for the decisions leading to the WARN Act liability.

Applying the DOL five-pronged test to the case, the court found that the plaintiff successfully alleged two of the five prongs, common ownership and de facto control, but not the remaining three: common directors and/or officers; unity of personnel policies emanating from a common source; and dependency of operations.  Citing precedent from the Southern District of New York, the court explained that each of the DOL factors is not a necessary element that must be satisfied in order for a plaintiff to succeed under the “single employer” theory, but, rather, that the factors are components of a balancing test that the court will weigh to determine whether the two entities are so interrelated as to constitute a “single employer.”

The court emphasized that the first two factors articulated by the DOL test—common ownership and common directors and/or officers—are of limited importance due to the separate legal personalities that corporations are traditionally accorded under law.  The court found common ownership existed by reviewing disclosures on the defendants’ websites, which stated that Fortis was a wholly owned subsidiary of the private equity parent.

The third prong—de facto exercise of control—was upheld by the Indiana court as “perhaps the most important prong of the DOL test,” so important that “if the de facto exercise of control was particularly striking . . . then liability might be warranted even in the absence of other factors.”  In probing this factor, the court looks to whether the private equity parent was the decision maker responsible for the employment practice giving rise to the litigation.  Here, the plaintiff alleged (i) the existence of weekly calls between the parent and portfolio company concerning the operation, financial condition and management of the company, (ii) payment of management fees to the private equity parent, and (iii) the deployment of partners and personnel by the private equity firm to supervise the management of the facility, including oversight of personnel decisions and the ultimate decision to close the facility.

In this case, plaintiff’s successful allegation of two of the five prongs of the DOL multi-factor test—common control based on ownership and de facto control—proved sufficient to consider the private equity parent and its wholly owned subsidiary as a “single employer” for purposes of liability under the WARN Act and withstand defendant’s motion to dismiss the claim.